Canadian Dollar Most at Risk

When the U.S. Fed begins tapering its quantitative easing program, the Canadian dollar will face more risk than other G-7 currencies.

Canada’s dollar is emerging as the Group of Seven (G-7) currency with the most at stake as traders debate whether the U.S. Federal Reserve will announce a reduction in its unprecedented monetary stimulus as soon as today.

The loonie and U.S. 10-year Treasury note yields are the most inversely correlated since August 2004, increasing faster in 2013 than any other G-7 peer apart from the U.S. dollar. That means any rise in U.S. yields should the Fed taper its $85 billion in monthly bond purchases may weaken Canada’s currency, which is already down 6.8 percent this year.

The Canadian dollar’s drop versus its U.S. counterpart this year makes it the sixth-worst performer among 16 major currencies tracked by Bloomberg. The loonie hasn’t fallen that much since weakening 18 percent in 2008. One Canadian dollar buys 93.99 U.S. cents. The Canadian currency slipped to C$1.0708 Dec. 6, its weakest level since May 2010.

Bank of Canada Governor Stephen Poloz said on Dec. 12 that the main interest rate may remain unchanged for “quite some time” as policy makers weigh the risk of a drop in housing prices against the threat posed by persistently low inflation. The target rate has been at 1 percent since September 2010.

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